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Microsoft Corporation Shares Surge on Strong Office and Cloud Growth

The software giant is seeing solid momentum in its Office 365 and cloud computing initiatives.

Microsoft(NASDAQ:MSFT) reported fiscal 2016 first-quarter results after the market close on Thursday. Under CEO Satya Nadella's leadership, the iconic tech company is making steady progress toward its goal of becoming a mobile- and cloud-first business. That appears to have put the once-struggling company back in investors' good graces, with Microsoft's shares up 10% as of noon Friday.

What happened with Microsoft this quarter?This was the first quarter under Microsoft's new operating structure. Revenue in the productivity and business processes segment, which includes Microsoft's Office business, declined 3% -- 4% in constant currency -- to $6.3 billion. Yet Office commercial products and cloud services revenue grew 5% in constant currency, with an impressive 70% jump (in constant currency) in Office 365 revenue growth. Helping to drive that growth was approximately 3 million subscriber additions during the quarter, which brought Office 365's total consumer subscriber count to 18.2 million.

Microsoft's intelligent cloud division, which includes its server and cloud computing businesses, saw its revenue rise 8% -- 14% in constant currency -- to $5.9 billion, boosted by more than 100% growth in the usage of its Azure cloud-computing platform, and 6x growth in the installed base of Microsoft's enterprise mobility solutions. Impressively, Microsoft's commercial cloud annualized revenue run rate now exceeds $8.2 billion.

Offsetting those gains was a 17% -- 13% in constant currency -- decline in revenue for Microsoft's personal computing segment, to $9.4 billion, due mostly to a weak global PC market. In addition, Microsoft's phone revenue plummeted 54% in constant currency, reflecting the company's continued struggles in the smartphone market. However, bright spots for the segment included news that 110 million devices were already running Windows 10, which also helped Bing's search advertising revenue jump 29% in constant currency. Xbox Live also enjoyed strong monthly active users growth of 28%, to 39 million.

Lastly, Microsoft continued to gush cash in the first quarter, generating nearly $8.6 billion in operating cash flow. Management remains committed to passing on that cash to shareholders, including $6.9 billion in share repurchases and dividends during the quarter.

What management had to say"We are making strong progress across each of our three ambitions by delivering innovation people love," said Nadella in a press release. "Customer excitement for new devices, Windows 10, Office 365 and Azure is increasing as we bring together the best Microsoft experiences to empower people to achieve more."

And COO Kevin Turner concluded, "We're seeing great traction with businesses who want to bring Microsoft's cloud, mobile device management technology, and data analytics together to improve security and productivity resulting in almost 70% year-over-year growth in our commercial cloud run rate."

Looking forwardIt appears that investors are willing to look past the weakness in Microsoft's personal computing division and focus more on the promise of its mobile- and cloud-based initiatives. As long as that remains the case, and Microsoft continues to show strong progress in these areas, more gains could lie ahead for its shareholders.

Author

Joe honed his investing skills as an analyst for Stock Advisor, Supernova, and Fool One. He battle-tested his investment philosophy and strategies as portfolio manager of Tier 1, a market-crushing Motley Fool real-money portfolio that delivered 24.58% annualized returns during its existence. Now, Joe’s mission is to pass on what he’s learned -- and what he continues to learn -- as a contributing writer to Fool.com.
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